Is gold beginning to lose its sheen? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is gold beginning to lose its sheen? 

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In this issue:
»  Will FY14 be better for Indian Auto?
»  Which US economist do you side with?
»  Interest in US Treasuries has increased
»  Telcos will be allowed spectrum sharing
»  ...and more!

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We are a quarter of a way into 2013 and the movement in gold prices would certainly have caught most by surprise. Indeed, after a stupendous bull run for 12 years, gold has lost 14% in 2013 so far.

The demand for the precious metal surged post the financial crisis as a store of value. Indeed, as central bankers in the developed world began printing reams of money to boost liquidity, the value of paper currencies increasingly began to be questioned. The global economy meanwhile deteriorated. Debt piled up in European countries such as Greece, Spain and Portugal bringing them to the edge of bankruptcy. Unemployment soared. But that did not put a stop to the quantitative easing programs of the developed world. Thus, with the economic scenario looking bleak, a tangible, precious asset such as gold began to find more takers. So much so that there were also growing talks of the global economy returning back to the gold standard.

So what does this latest slide in gold prices signify? Are signs of a recovery becoming more visible as a result of which interest in gold is beginning to peter out? We do not believe so. There does not seem to be any concrete evidence that the global economy is on the mend. Companies are not investing much, consumers are not spending much and overall sluggishness continues to persist. Unemployment remains high and there is hardly any job growth happening. The recent crisis in Cyprus has only highlighted that risks in the system have not been eliminated. And the massive stimulus measures announced in Japan have only shown that central bankers are not completely done yet with monetary easing.

All of which increasingly means that the slide in gold in recent times is more of a correction. What is more, as per an article in Moneynews, noted investor Jim Rogers believes that while this is just the correction that gold needs, it has still not gone down enough. When it drops more, he will buy more of the metal. We are not sure to what level gold prices will correct. But we are of the view that the case for gold in the longer term still remains quite strong. Especially as long as governments across the world keep printing paper money. That is why, if you haven't started making gold a part of your portfolio, a correction in prices is certainly the right time to do so.

Do you think that the recent slide in gold prices means that the rally in the precious metal is over? Please share your comments or post them on our Facebook page / Google+ page

01:26  Chart of the day
FY13 is a year that the auto industry would dearly like to forget. As the economy slowed down, most of the segments in the auto space reported either a tepid growth or a decline in volumes. Only light commercial vehicles (LCVs) and utility vehicles (UVs) managed to buck the trend. While LCVs grew by a respectable 14% YoY during the fiscal, UVs were the star performers as they logged in an impressive growth of 52% YoY during the period. Now with this bleak year behind them, can auto players look for better growth prospects in FY14? It is always difficult to predict a turn of the cycle. But from the way things stand now, we will not be surprised if the first half of FY14 also does not see much growth. However, things should hopefully start improving thereafter.

*Passenger vehicles, **Commercial vehicles
Data Source: SIAM

By doing what it has, the US Fed has clearly split economists into two distinct camps. Ones who totally believe in its policies and the ones who feel that the US central bank is taking the US on the path of an eventual destruction. Thus, when these two camps square off against each other, sparks are obviously going to fly. Like they did recently when Mr Stockman, a former budget director under President Reagan and Paul Krugman, a Nobel Laureate came face to face on a TV channel.

It goes without saying which side was Krugman on. This gentleman has been shouting himself hoarse from the rooftops that all we need is more and more money printing and for the US Fed to get even more aggressive. Stockman on the other hand has been extremely critical of Fed's policies. As per him, the Federal Reserve has basically become a bubble machine and that Bernanke is the single most dangerous man ever to occupy high office in US history. Well, we don't quite know what to make of this. Should we applaud the views of Mr Stockman for seeing it as it is? Or should we be dejected that if a man of Krugman's caliber cannot get a hang of what's going on, what chance do commoners have? As far as we are concerned, there is no doubt what's currently underway is certainly going to end up causing significant damage. And the more we prolong it, the worse the outcome will be.

Views on not just gold but several other asset classes are seeing a radical change. No we are not referring to silver, realty or oil. US Treasuries that are considered safe haven bets by FIIs had lost their allure not so long back. The fiscal cliff concerns in the US had especially drawn investors away from the government papers. Not much has changed since then. The US is definitely not out of fiscal problems. The cliff has been deferred and not avoided. But with global economy, particularly China and India showing signs of economic slowdown, the US looks relatively better. Expectations of an economic recovery have therefore brought back interest in US Treasuries. As per an article in Financial Times, while US equities are nearing peak, the demand for US bonds is no less. China and Japan, the two largest holders of US Treasuries, are undoubtedly cheering this development. We believe that it is only a matter of time before the US Treasuries show their true color. And while FIIs keep getting drawn to them as safe haven assets, valuation of equities may see some much needed correction.

The government has finally come up with a rule that will help the telecom sector. This is to allow sharing of spectrum by the telcos. It seems like a wise move given that spectrum is a scarce resource. Therefore sharing it makes sense. But the finer print accompanying the decision makes it more of a bane than a boon. As per the Mint, the pre-conditions include payment of the onetime fees as well as payment of a combined spectrum usage charge. Therefore the operators would need to work out the business sense in sharing spectrum. Moreover there is still lack of clarity on some issues including sharing spectrum where the company has received a license but is yet to receive spectrum to start services.

If the company goes ahead and shares spectrum with another operator, then it could be against the interests of DoT. Therefore operators will seek more clarity before going ahead with a sharing agreement. The government has recently punished leading incumbents for their 3G roaming agreements. Such incidents have made the operators cautious. They do not wish to be caught on their back foot on this one again.

The biggest hindrance in spectrum sharing is that most operators do not have spare capacity to share. Other than state owned BSNL, nearly all operators are operating at full capacity. This is why they have been demanding spectrum in the first place. Therefore though the move to allow spectrum sharing is a good one; the government still has a lot of work to do to make it a reality.

For three long decades, China has grown at a gravity-defying pace. An economic model based on investments and exports coupled with an expanding global economy facilitated China's double-digit growth.

But this can certainly not go on forever. And it is increasingly becoming clear that the days of high-speed growth in China may be over. In the first quarter of this year, China's economy expanded by 7.7% over the previous year's corresponding quarter. Such moderation is part and parcel of economic cycles.

But when an economic giant goes through an economic transformation, it has far-reaching effects on other economies. It is widely known that China has been the biggest consumer of commodities in the previous decade. As such, a slump in Chinese imports is set to adversely affect raw material exporting nations. An article in the Financial Times points out that many commodity exporters have invested heavily to increase supplies of raw materials. They had wrongly assumed that China would grow faster than 9% forever.

Regions such as Australia, Latin America and Africa will be severely affected by declining Chinese imports. Overall, the world is likely to see a declining trend in commodity prices. This is assuming that major developed economies are unlikely to report a robust recovery.

Persistent buying activity led the Indian markets to gain momentum during the post noon trading session. At the time of writing, the BSE-Sensex was trading higher by about 230 points or 1.3%. Barring stocks from the information technology and metal spaces, buying activity was seen across the board with banking and realty stocks leading the pack of gainers. As for the BSE Mid Cap and BSE Small Cap indices, the same were up by about 0.6% and 0.4% respectively. Stock markets in rest of Asia ended the day on a mixed note with China up by about 0.6%, while Hong Kong and Japan ended lower by 0.5% and 0.4% respectively.

04:56  Today's investing mantra

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